Choosing the right business structure for your handmade business

Most makers don’t think about their business structure until tax time. And by then, it’s usually too late to optimise. Whatever you were set up as last year is what you’re filing as now.

The key here is that picking a structure isn’t scary bureaucracy. It’s a 30-minute decision that shapes how much tax you pay, how much liability you carry, and what paperwork lands on your desk every year. Worth getting right.

This is a US-focused guide covering the three structures most handmade sellers actually use: Sole Proprietorship, Partnership and Limited Liability Company (LLC). We’ll go through each one, then finish with a comparison table and a quick “which one fits me?” framework at the end.

Before we start: if you’re still wondering whether what you’re doing even counts as a business, have a read of our post on whether your handmade shop is a hobby or a business first. The IRS has an opinion on this, and it matters.

Sole Proprietorship

A sole proprietorship is the default structure you get the moment you make your first sale. No paperwork required.

It sounds strange, but in the US you can start a business without signing a single form. It’s your activity that defines whether you’re running a business, not a piece of paperwork. Open an Etsy shop today, make your first sale, and congratulations: you’re a sole proprietor.

In this structure, you’re the singular owner. You’re entitled to all profits, and you’re also personally responsible for all debts, losses and liabilities. This is called unlimited liability, and it’s the big thing to be aware of: if the business owes money, you owe money.

There are no separate business taxes. The owner pays tax on business income as part of their personal income tax, reported on Schedule C of Form 1040. If you’d like to understand how your materials and finished stock flow into that return, we’ve also written a guide specifically on COGS and Schedule C for handmade sellers.

Even though there’s no formal registration, you’ll still want to check:

• Your state and local business licences and permits
• Home-occupation rules if you work from a residential address
• Sales tax registration in every state where you have nexus
• A DBA (Doing Business As) filing if you’re trading under a name that isn’t your own legal name

One quick tip on DBAs: if you’ve created a fictitious name for your shop (say “Meadowlark Ceramics” instead of “Jane Smith”), you’ll want that filed with your state or county so you can legally operate and open a bank account under that name.

Advantages

• Minimal startup cost, often zero
• Complete control over every decision
• You can wind down, sell or transfer at any time
• No corporate tax layer, so profits pass straight to your personal return
• Very little ongoing formal paperwork

Disadvantages

• You’re personally liable for everything the business owes
• No legal separation between you and the business
• Harder to bring on outside investors if you want to scale later
• Some customers and wholesale accounts take you less seriously without an LLC or corp after your name

Partnership

A partnership is what you end up with when two or more people run a business together without registering as an LLC or corporation.

Let’s say instead of running your business alone, you team up with a friend who does the photography while you handle production. You plan to split the profits. That’s a partnership. There are two flavours most handmade businesses consider: Limited Partnerships (LP) and Limited Liability Partnerships (LLP).

Limited Partnerships (LP) have one nominated general partner with unlimited liability. That’s the person who accepts personal responsibility for the company’s debts if things go wrong. All other partners have limited liability, meaning they can only lose what they’ve actually invested. Profits pass through to each partner’s personal tax return, but the general partner also pays self-employment tax on their share.

Limited Liability Partnerships (LLP) differ in that all partners have limited liability. No single person is on the hook for everything. LLPs are more commonly used by professional services (lawyers, accountants) than by handmade businesses, but they exist as an option.

Unlike the sole prop structure, partnerships have to register with the state, typically through the Secretary of State’s office. You’ll also want a written partnership agreement (even with your best friend, even with your spouse) covering:

• Ownership percentages
• How profits and losses are split
• Who decides what
• What happens if someone wants to exit

Advantages

• Shared workload, shared startup costs
• Combined skills (one maker, one marketer, for example)
• Still pass-through for tax purposes
• More credibility than an unregistered side hustle

Disadvantages

• Shared legal liability for each other’s actions in the business
• Partnerships require a formal agreement, and legal fees to draft it properly
• Disagreements between partners can derail the whole business
• Annual partnership tax filings (Form 1065) are more complex than Schedule C

Limited Liability Company (LLC)

An LLC combines the liability protection of a corporation with the tax simplicity of a sole proprietorship or partnership.

This is the structure a lot of makers graduate into once they’re making meaningful money, selling wholesale, signing contracts, or feeling nervous about product liability (think: skincare, candles, pet treats, anything consumable).

Profits and losses pass through to your personal income, so there’s no corporate tax layer, but your personal assets (your house, your car, your savings) are generally protected from business debts and lawsuits. Members of an LLC are still considered self-employed for tax purposes, so you’ll pay self-employment tax on your share of profits.

LLCs are flexible: you can be a single-member LLC (taxed like a sole prop) or a multi-member LLC (taxed like a partnership). You can also elect to be taxed as an S-corporation once your profits get high enough to make that worthwhile. That’s a conversation for your accountant once you’re clearing meaningful income.

A few practical notes:

• LLCs are formed at the state level, so formation fees and annual fees vary widely (from about $50 up to several hundred dollars a year, depending on the state)
• You’ll usually need a registered agent: either yourself at a physical address in the state, or a paid service
• Most states require an annual report and annual fee to keep the LLC in good standing
• You’ll want a separate business bank account and clean bookkeeping. Mixing personal and business funds can “pierce the corporate veil” and cost you the liability protection

Advantages

• Personal assets are protected from business debts and most lawsuits
• Income still passes through to your personal return, with no double taxation
• More credible to wholesale buyers, suppliers and insurers
• Flexible tax treatment, with the option to elect S-corp status later as income grows

Disadvantages

• Formation fees and ongoing annual fees vary by state
• More formal record-keeping required to maintain the liability shield
• Transferring ownership is harder than with a sole prop
• You’ll likely need an accountant at tax time, which adds cost

Comparison: sole prop vs partnership vs LLC

Here’s how the three structures stack up on the things that actually matter day to day:

One thing worth calling out: the difference between a single-member LLC and a sole proprietorship at tax time is almost nothing. Both file on Schedule C. The real difference is what happens the day someone sues you over a candle that caught fire or a soap that caused a reaction. The LLC is the firewall between your business and your personal savings.

Which structure is right for you?

There’s no universal “right answer” here. It depends on what you make, how much you’re earning, and how much risk you’re willing to carry personally. But here’s a rough framework that works for most handmade sellers:

Stick with a sole proprietorship if:

• You’re just starting out and testing whether this is actually a business
• Your products carry low liability risk (prints, paper goods, digital patterns, jewellery made from inert materials)
• You’re earning a few thousand a year and not yet doing wholesale
• You don’t have significant personal assets to protect

Consider forming an LLC if:

• You make anything consumable or wearable (skincare, candles, food, pet treats, children’s products)
• You’re doing wholesale, consignment, or signing contracts with retailers
• You’re earning enough that a lawsuit or debt would actually threaten your finances
• You own a home or have savings you want to keep separate from the business
• You want to open a business bank account, get a proper EIN and take yourself seriously

Consider a partnership if:

• You’re genuinely going into business with another person (not just sharing a table at markets)
• You’ve had the awkward conversations about money, ownership and exits
• You’re willing to draft a proper agreement with a lawyer

And a reality check: the LLC is the most-recommended structure for growing makers, but it’s not automatic. The formation fee is trivial. The ongoing discipline (separate bank account, clean books, annual filings) is what catches people out. An LLC you run like a sole prop offers almost no extra protection.

What your structure changes about bookkeeping

The structure you pick affects how you track money. Here’s the short version:

• Sole proprietorship: one Schedule C at tax time. Materials, finished stock and COGS all flow onto that single form. Clean bookkeeping matters, but the structure is simple.
• Partnership: Form 1065 plus K-1s for each partner. You’ll want proper bookkeeping software and almost certainly an accountant.
• LLC (single-member): same as sole prop for tax purposes (Schedule C), but you need to keep business finances completely separate from personal ones to maintain the liability shield.
• LLC (multi-member): same as partnership at tax time, plus the liability protection.

Whichever you pick, the bookkeeping fundamentals are the same: you need to track what you spent on materials, what you made, what it cost to produce, and what’s still sitting on the shelf at year-end. That’s the information your Schedule C (or 1065) needs, and it’s also the information that tells you whether you’re actually making money on each product. Our Schedule C guide walks through exactly what goes where.

Frequently Asked Questions

Please note that tax and business laws change frequently. This information is for educational purposes only and should not be construed as tax or legal advice. Please consult a licensed accountant or attorney in your state with specific questions about your situation.